Co-investment is the long standing but regularly overlooked
subset of Private Equity (PE) which has helped
fuel the sector's record setting activity over the last two
years. With co-investment as a contributor to PE funding growth,
2014 saw 2,700 buyouts globally worth US$386bn, the highest value
since 2007. Even though 2015 cooled slightly, it was still on pace
to be the second best year since 2008. In response to this
resurgence of co-investments, Mergermarket, an M&A intelligence
and news service, conducted a
market-wide survey (Survey) of 50 US based
private equity executives who had co-invested within the last 3
years. The results provide an interesting look 'behind the
curtain' of the newly favoured investment mechanism.
What is a co-investment?
Simply put, co-investment is when a fund (sometimes referred to
as a general partner or sponsor) partners with an individual
investor (sometimes referred to as a limited partner or
co-investor) to invest in a separate company. For example, Fund A,
which is composed of investors 1-4, wants to buy Company B.
However, Fund A does not have enough capital available to purchase
Company B. Fund A then decides to offer to co-invest with one of
their investors, Investor 4. This is a standard co-investment;
however, they can be more complicated with multiple individual
investors, and investors who are unrelated to the fund.
Co-investment is an increasingly popular option for PE firms
looking to gain access to additional capital without long term
commitments. According to the Survey, 56% of funds actively offer
co-investment opportunities to their limited partners
(LPs). Moreover, an additional 42% offer
co-investment if the opportunity presents itself. However, despite
these high numbers co-investment only occurs in 30-40% of
Interestingly, co-investment is highly centralized. 62% of LP
investors are already investors in the co-investing fund, as well
an additional 18% are referrals from the LP investors, meaning that
only 20% of co-investors are unrelated to the fund or its
underlying LPs. While this does reduce risks as the co-investors
will likely be more comfortable with each other, it also shows a
missed opportunity for funds to branch out and increase their
The structure of the co-investment varies by the needs and
desires of the parties. There are five main structures the LP
an indirect investment in the portfolio company;
a direct investment in the portfolio company;
an indirect investment through a special purpose vehicle
controlled by the sponsor;
an indirect investment in holding company; and
a direct investment in holding company.
The most popular structure is an indirect investment, where the
investor does not take a role in the company and is simply there to
reap the rewards of a separate investment. Interestingly, the
Survey also suggests LP investors are increasingly pushing for
direct roles and even requesting board seats for their
Opportunities and challenges
Co-investment provides benefits to both parties. LPs get a
bigger stake in the investment with very little 'legwork',
while PE firms get to share the risk of the investment, extract
more capital from investors and facilitate relationships with
specific investors outside of the constraints of the fund. The main
stumbling block to co-investment is regulatory scrutiny; in fact it
was the largest and most often cited concern in the Survey.
Regulators are increasingly turning their eye to these transactions
and looking for increased transparency in co-investments,
particularly when it comes to fees and expenses.
The resurgence of co-investment has fueled a welcome boost to
the PE market which provides a benefit to investors and
organizations alike. It will be interesting to see how the market
for co-investments will continue to evolve as more sophisticated
investors take part and push for more active roles.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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